ECON303: Labor Economics

Unit 5: Compensating Wage Differentials

In the previous units, you learned how a worker decides whether he
or she should work or not, and how long he or she should work for.
These units worked from a competitive labor market model based on
the assumption that all jobs and workers are homogenous in nature.
In this scenario, the compensation was the sole factor that
determined whether an individual would take a job or not. In
reality, however, we cannot ignore the heterogeneous nature of both
the work force and the job market; we know that different workers
focus on different aspects of a job when making the decision to work
or not. Therefore, we will now adopt a more realistic approach,
considering the roles that both compensation and non-wage
characteristics play in an individual’s decision to accept a given
job offer. The differences between types of labor and the skill
sets that workers have result in corresponding differences in
wages. In this unit, you will study how differences in job
characteristics have an impact on the determination of wages and
employment. (The determination of wages and employment due to
differences in skills of workers will be presented in the next
section.)

Unit 5 Time Advisory

This unit should take you 6 hours to complete.

☐ Subunit 5.1-5.2: 2 hours*

☐ Subunit 5.3-5.4: 2 hours

☐ Assessment:2 hours

*(Note: The audio narration for “Chapter 8” is 50 minutes long.)

Unit5 Learning Outcomes

Upon successful completion of this unit, students will be able to:

Analyze the reasons behind wage differentials due to non
pecuniary characteristics of alternative types of employment.

Analyze the hedonic pricing model with the end result of
employer-employee matching and analyze the theoretical model to
the case study presented in the end of this unit.

Instructions: Please click on chapter 8 from the Table of
Contents. Note that the material is presented in three formats:
Single document HTML format, narrated PowerPoint, and PowerPoint
Slideshow. Please go through the narrated PowerPoint to best
understand the material. You can read the HTML text to review
the material after listening to the audio. However, you may
skip the notes presented in the PowerPoint slides as they are a
repetition of the slides that accompany the audio. If the audio
does not work at first, refresh your browser. This reading
covers subunits 5.1-5.2.

Terms of Use: Please respect the copyright and terms of use
displayed on the web pages above.

Instructions: Please choose “Lecture Notes” from the list to
access the pdf file with the lecture notes. Scroll down to page
74, section 8 ("Compensating Differentials") and read the
section in entirety, all the way up to page 77. This reading
covers subunits 5.4.1-5.4.4.

Terms of Use: Please respect the copyright and terms of use
displayed on the web pages above.

5.4.1 A Model of Compensating Differentials

5.4.2 What Is the Value of a Human Life?

5.4.3 What Is the Value of School Quality?

5.4.4 Limitations of Compensating Differentials

Unit 5 Assessment and Guest Lecture

Assessment: University of Wisconsin: Professor John Kennan’s
“Assignments for Labor Economics Course”

Instructions: This is an optional lecture and not a
requirement of the course. In this guest lecture, the speaker
presents a light-hearted rendition of his research of drug
dealers and draws comparisons between the characteristics of
drug dealing and economics principles.